Rising oil prices challenging agriculture

Corn for ethanol production has gotten the most ink, but Kendall Keith, executive director of the National Feed and Grain Dealers Association, says the demand for agricultural products and challenges to U.S. farmers goes much deeper.

No doubt the ethanol demand has created high prices for corn. Use of corn for ethanol in 1997 was less than 500,000 bushels. In 2007, corn for ethanol topped three million bushels. By 2010 corn used for ethanol is expected to push five million bushels.

The high cost of corn for ethanol and soybeans for biodiesel, combined with poor cropping seasons worldwide, have pulled wheat along in the grain price structure. The high prices have induced growers worldwide to plant more acres, but has not resulted in more production, primarily due to drought and other weather-related problems in the U.S. and other large grain producing countries.

The real challenge for American agriculture, according to the feed and grain leader is to cope with the escalating price of oil, and subsequently of fossil-fuel products that are so critical to agriculture production.

Moving from low (less than $80 per barrel to over $100 per barrel is directly related to a 23 percent increase in U.S. wheat prices, 40 percent for corn prices and 22 percent for soybean prices. Increased cost for commodities is forcing a rise in food prices that Keith says is likely to escalate sharply if current commodity prices remain at record highs for long periods of time.

Worldwide the challenge of going from low to high oil prices isn’t much better. For example, Australian wheat prices have increased 16 percent and Canadian feed barley prices have gone up by 22 percent in response to increasing oil prices.

The impact of the corn for ethanol demand has not significantly lowered corn stocks available for use worldwide over the past decade, which makes the continuing high cost for corn even more surprising.

Corn stocks to use ratios hovered around 15 percent from 1997 to 2007, with a low of nine percent in 2003 and a high of nearly 20 percent in 2004.

However, that stability may be about to change. Keith says one economic projection shows corn stocks dropping to about six percent in 2008 and declining to three percent by 2011. The agricultural industry, he says, cannot live with such low stock-to-use ratios.

Wheat prices show a similar trend. In 1998 the wheat stock-to-use ratio was 28 percent. By 2007 that ratio was cut in half and going downward. Wheat stocks-to-use ratios below 10 percent are not unlikely in the next few years, putting the cost of wheat-containing foods worldwide at great risk.

In 2008, corn, wheat and soybean acres worldwide area is expected to top 1.9 billion acres, with expectations in the U.S. as high as 225 million acres. However, Keith says many in the private sector doubt the U.S. can exceed 221 million acres without bringing several million acres out of the USDA CRP program.

Currently, 39 million acres of land is in the program. Legislation has been proposed, but not acted upon by the Bush administration, to remove seven million acres from the CRP program. The time limit for doing so to help with the 2008 crop is past and even if these acres are taken out of the program, there is concern that a high percentage of the land is not suitable to grain production.

“Really it comes down to adding the risk to birds and the environment versus increasing the risk to our food supply,” Keith says.

The risk to the environment from putting land back into agricultural production is small, he says.

Retail food prices in 2007 were up four percent and wholesale prices up 7.5 percent. “The U.S. food industry is one bad weather year away from disaster,” Keith concludes.

In the past nine months the dire impact of high commodity prices on food seems to be coming true. Over the past nine months (June 2007-March 2008) global food prices have increased by about 40 percent, leaving food reserves at a 30-year low. This food price increase is beginning to create global social and economic hardships.

Case in point is U.S. Agency for International Development will significantly scale back emergency food aid to some of the world’s poorest countries. The agency is drafting plans to reduce the number of countries receiving U.S. food or reducing the amount sent these countries, or both.

In the U.S., the cost of milk rose by 26 percent and the cost of eggs 40 percent, both directly related to the high cost of grain, which is directly tied to the high cost of oil.

The high cost of grain has driven intense competition for acreage among all U.S. commodities. Like no other time in U.S. history, farmers in the Southeast can pick and choose from a long list of commodities, from sweet potatoes to tobacco to cotton or grain crops and all are at or near 10-year highs for price.

The same forces that have driven U.S. farm prices so high — primarily the demand for middle class amenities by middle class people in China, India and a handful of other mega-developing countries around the world. Competition for grain to feed livestock for meat is a driving factor in grain supplies and prices worldwide. That same demand fuels demand for fossil fuel products.

The other side of the coin is diminishing farm acreage worldwide, with the U.S. being at or near the top in number of acres lost from agriculture to other sources. In the Southeast, North Carolina and Georgia are consistently near the top of the list in number of farm acres lost. Not ironically, both are near the top in population increase.

How the agriculture industry reacts to this historic competition among commodities for land will in large part determine the future of the industry, according to Keith.